Introduction and Summary of Recommendations

On May 7, 1996, the Auditor General released a report describing serious concerns with the administration of the Income Tax Act. The Auditor General's report raised important issues regarding Canada's tax policy as it relates to persons who become or cease to be resident in Canada.

An examination of that policy is certainly due. Parliament has not significantly reviewed the tax rules relating to taxpayer migration since they were first enacted in 1971. In the intervening 25 years, both capital and persons have become more mobile, and competitive pressures on the Canadian tax base have increased. The Auditor General's report was a timely reminder that the tax system must be kept up to date if it is to be an efficient and equitable source of public revenue.

The Auditor General's specific comments centred on Revenue Canada's provision, in 1985 and 1991, of particular advance tax rulings relating to the emigration of taxpayers and the distribution of Canadian trust property to a non-resident beneficiary. The Auditor General expressed two main concerns with the rulings. First, that the transactions ruled upon "may have circumvented the intent of the law regarding the taxation of capital gains," with the result that Revenue Canada forfeited a claim to "many millions of dollars in tax revenue." Second, the Auditor General concluded that Revenue Canada and the Department of Finance did not adequately analyze and document the decisions to issue the rulings, and did not attempt to measure the rulings' potential fiscal impact.

As part of the Government's response to the Auditor General's report, the Minister of Finance asked this Committee to undertake a review of Canadian policy on the taxation of non-residents, immigrants and emigrants. In particular, the Minister asked the Committee to examine and make policy recommendations in two areas:

The taxation of individuals (including trusts), partnerships and corporations that become or cease to be resident in Canada, including the identification of

(ii) possible improvements in the measurement of tax owing on departure from Canada, and means of securing collection without impeding taxpayer mobility; and

(iii) options for the income tax treatment of non-resident trusts created by or on behalf of immigrant individuals.

The relationship between domestic Canadian policy in the above and related areas, the policies of Canada's trading partners and Canada's international commitments as reflected in bilateral income tax treaties.

The Committee undertook this review not only as a result of the Minister's request, but also further to the Auditor General's own suggestion. In a letter to the Chairman of the Committee, the Auditor General noted that this part of his report referred to government programs that fall within the Committee's purview. The Auditor General went on to offer the Committee his own and his staff's assistance in understanding the issues identified in the report, an offer the Committee was grateful to accept.

The Committee began its hearings on this matter on May 28, 1996. Over the course of the hearings the Committee heard from the Auditor General and members of his staff, and senior officials of Revenue Canada, the Department of Finance and the Department of Justice. In addition, the Committee convoked a round table session involving some of Canada's leading tax experts. That session was particularly valuable, in that it greatly clarified the complex technical questions involved in this area of the tax law.

Reflecting the Committee's mandate, this Report focuses on the direction Canada's income tax policy relating to non-residents and migrants ought to take in the future. That policy can only be understood, however, against the background of the existing law. The Report therefore summarizes the current rules on taxpayer migration, and discusses their policy foundations.

The main body of this Report does not evaluate the Auditor General's specific critique of Revenue Canada's 1985 and 1991 advance tax rulings. Instead, that evaluation is included in an Appendix, which deals at length with each of the points raised in the Auditor General's report. There are two reasons for separating this material from the main body of the Report. First, the Committee is confident that most readers, including most Members of Parliament, are chiefly interested in the important policy questions the Committee was asked to examine. Second, the Committee has some reservations about the way in which the Auditor General presented his concerns with the rulings. This second point bears some explanation.

Parliament and the Canadian public expect the Auditor General to investigate and report on all aspects of government activity. This is a demanding responsibility, and the current Auditor General and his predecessors deserve much credit for their consistent excellence in fulfilling it. It would be asking too much, however, to expect the Auditor General also to scrutinize the day-to-day work of each of the many technical professionals in the public service. Government scientists, lawyers, engineers and other professionals work in highly specialized fields requiring significant expertise. The Auditor General does not and could not pretend to match that expertise in a way that would permit his officials to second-guess the specialized work of these public servants. Nor, in the Committee's view, is it the role of the Auditor General to settle whatever technical ambiguities or uncertainties may arise in a given field of work. In short, the Auditor General cannot be asked to intervene in public servants' reasonable exercise of their professional judgement.

The Revenue Canada rulings in question were the product of just such an exercise of judgement. As the Auditor General testified before the Committee, the rulings were not frivolous, or unreasonable, or clearly wrong. There was no evidence of wrongdoing or interference in the decision-making process.

Officials from the Office of the Auditor General nonetheless chose to call the rulings into question. They concluded that Revenue Canada's experts may have incorrectly interpreted and applied the law, which was admittedly ambiguous. They suggested that the rulings caused substantial losses of potential tax revenue.

As it happened, these fears were unfounded. Most of the private-sector and government tax professionals who testified before the Committee stated that the rulings correctly applied the existing law. Nor was there persuasive evidence of revenue loss resulting from the rulings.

Even if the evidence had gone the other way, and the rulings had been shown to have been in error, the Committee is not certain that it would have been appropriate for the Auditor General's officials to attempt to substitute their own views for those of Revenue Canada. Public servants, like other workers, cannot be held to an impossible standard of perfection. Provided their actions are reasonable, professionally competent and carried out in good faith, they should be allowed to do their work without fear of being pilloried many years later for those actions.

In any event, this is not the case here. These rulings decisions were, as far as the Committee can determine, correct. Revenue Canada, in making a difficult decision on complex and ambiguous provisions of the Income Tax Act, acted prudently and professionally. It consulted both its legal counsel in the Department of Justice and the tax policy authorities in the Department of Finance before ruling. The Committee cannot envisage that a higher standard of conduct be imposed on our public servants.

It concerns the Committee that the Auditor General, even when faced with a great deal of evidence that his officials' assessment of Revenue Canada's professional judgement was unfounded, was reluctant to reconsider that assessment.

The Committee is also concerned by the effect of the Auditor General's report on taxpayers' assurance of confidentiality. The report of May 7, 1996 includes a good deal more information about certain taxpayers than was necessary to explain the Auditor General's concerns. The report was not tabled in camera, but was very broadly distributed, both in paper and on the Auditor General's Internet site. The result was rapid and widespread speculation as to who the taxpayers were. Most members of the Committee, and it can be presumed a great many other Canadians, have read or heard accounts of why, given the information disclosed by the Auditor General, the taxpayers could only be certain persons and no others.

The Auditor General told the Committee that he had obtained a legal opinion to the effect that his report did not constitute an offence under the Income Tax Act's confidentiality rules. With respect, the Committee would have expected the Auditor General to understand that the issue was not the legality of his disclosures, but their effect. In revealing more than necessary the Auditor General has very likely caused taxpayers who seek advance tax rulings to wonder if they can still rely on Revenue Canada's assurances of confidentiality. That uncertainty can only impede the rulings process -- a process the Auditor General himself has described as a valuable service to taxpayers.

For these reasons, the Committee has chosen to confine its detailed examination of the Auditor General's specific concerns to a special annex, Appendix B. That Appendix deals as thoroughly as possible with each of the points raised by the Auditor General, and includes certain administrative recommendations for the attention of the Minister of National Revenue.

This Report's principal recommendations have to do with the policy behind Canada's taxation of individuals who become or cease to be residents of this country. As one of only three countries with any comprehensive system for the taxation of individual migrants, Canada already has a stricter system than almost every other country. The Committee concludes that while that system is generally sound, it could be significantly improved.

A. Findings and Recommendations for Changes in the Law

The Committee main findings with respect to Canada's current and possible future policy with respect to the taxation of migrants' gains are as follows:

Canada appropriately taxes non-residents, including former residents, only on gains that can be considered to have a source in Canada.
The concept of taxable Canadian property (TCP) establishes the sorts of property in respect of which non-residents' gains are considered to be sourced in Canada. Although the concept applies primarily to non-residents, Canada's policy for the taxation of emigrants requires that it apply as well to residents of Canada.
Canada's policy of negotiating bilateral tax treaties that generally accord with the OECD model does require Canada to relinquish its right to tax some gains, in return for the right to tax others. This practice is standard among OECD countries.

Based on these findings, the Committee makes the following recommendations:

Recommendation 1: Classification of property

That the Minister of Finance consider amendments to the Income Tax Act to prevent the inappropriate manipulation of a property's status as between "taxable Canadian property" -- the sort of property on which non-residents' capital gains are taxed in Canada -- and other property.

Recommendation 2: Scope of TCP definition

That the Act be amended to clarify that property may be taxable Canadian property to any taxpayer, whether the taxpayer is a resident of Canada or a non-resident.

Recommendation 3: Distribution of trust property

That changes be made, if necessary, to ensure that any accrued gains on trust property distributed to a non-resident beneficiary are taxed either in the hands of the trust or in the hands of the beneficiary.

Recommendation 4: Emigrants' accrued gains

That the Minister of Finance consider amendments to the Act to compute an emigrating individual's tax liability on all gains that have accrued up to the time of departure, other than gains that will never be treaty-protected from Canadian tax, with actual payment due only on realization (provided the emigrant has given adequate security).

Recommendation 5: Information reporting

That all individual emigrants from Canada be required to report all property holdings to Revenue Canada at the time of emigration.

B. Findings and Recommendations Regarding Concerns Expressed by the Auditor General

The Committee's main findings with respect to the substantive and procedural concerns identified in the Auditor General's report can be summarized as follows:

The advance tax rulings issued by Revenue Canada in 1985 and 1991 and discussed by the Auditor General in his report of May 7, 1996, were well-founded in the existing law.
Under its existing policies, Revenue Canada had no basis for refusing to issue the rulings, which clarified an acknowledged ambiguity.
It is not possible to conclude that the rulings have or are likely to cost the Canadian fisc any significant tax revenue.
There has been no suggestion of political or other interference with respect to the rulings; nor of any impropriety on the part of any official.
Revenue Canada and the Department of Finance could have more fully documented the decision-making process that led to the rulings.
The Committee is pleased to note that Revenue Minister Stewart announced immediately upon publication of the Auditor General's Report that she had directed Revenue Canada to take immediate steps to improve documentation of tax policy interpretations.

Based on its findings, the Committee makes the following recommendations:

That Revenue Canada review the changes it has made to ensure consistency among advance tax rulings and opinions, and implement any further changes that may be necessary to achieve this objective.
That Revenue Canada implement its planned publication of all advance rulings as soon as possible.

The Committee wishes to thank all the witnesses who appeared before it on this matter. Their expert testimony was essential to the Committee's understanding of the intricate technical and policy issues it undertook to examine. In addition, and despite its misgivings about the way in which he chose to present the issue, the Committee considers that the Auditor General deserves special thanks for having directed Parliament's attention to these tax provisions and procedures involved in the rulings.

This action of the Auditor General has resulted in our recommendations for changes. The Committee also hopes that future audit disclosures of the Auditor General will be presented in a manner that will insure taxpayer confidentiality, enhance use of the ruling process, and respect the professional expertise of Canada's public servants.

In summary, the Committee is of the view that it was appropriate for the Auditor General to recommend that the rulings in question demonstrated a need to examine the laws and procedures; it was inappropriate to question the rulings themselves and thereby calling into question the competence of those who made them.